The sale of your business will be one of the most important business transactions you ever make.
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Many business owners depend on the proceeds of the sale for either their retirement or for seed money to fund their next business endeavor. Although selling your company through a business broker may be the best approach, you should also be open to the possibility of selling your business through an investment banker.
An investment banker facilitates the sale of your company by issuing and selling securities. Instead of looking for buyers, they establish a securities framework and look for investors who are willing to buy all or part of your ownership interest in the business. For medium and large businesses, this can be an attractive alternative to a single buyer scenario because it allows a higher volume of prospective buyers to participate in the purchase.
In exchange for their involvement in the deal, investment bankers are compensated according to an established fee structure. Although the fee structure varies, don't plan on enlisting the aid of an investment banker unless you are prepared for the financial commitment it takes to hire a decent firm.
Investment banker fee structures usually consist of two parts: An upfront retainer and a closing success fee.
- Retainers. The retainer portion of an investment banker's fee is a flat, monthly fee that is eventually credited toward the closing success fee. The reason investment bankers require a retainer (as opposed to brokers who are paid on commission at the time of sale) is because much of an investment banker's time is spent evaluating the investment worthiness of the business and laying the groundwork for a securities sale. Many times, the business is found unsuitable for investment and shares are never sold to investors. If that happens, the investor banker walks away with the retainer, but not the remainder of the success fee.
- Success fees. Success fees are based on a percentage of the "enterprise value" of your company. It represents the completion of a securities offering and (in essence) the sale of your business. Most success fees fall in the 5% range with a floor established for a minimum dollar value to the investment bank.
As the seller, your objective should be to minimize the amount of the retainer as a way to incentivize the investment bank to see the deal through to completion. At the same time, the investment bank will want to frontload their fee to maximize the amount of their guaranteed income. Legal intricacies abound, so make sure to have your attorney thoroughly vet your banker's fee structure language before you make any legally binding commitments.